EU Biofuel policy impact on price fluctuations David Laborde July 2014
Biofuels and Price stability: Overview A demand effect: Short term: Surprise effect role on inventories. Should disappear Long term: effect Link to energy markets on the demand side ( more or less price stability?) Current effect: the role of mandatory policies (G20). Agricultural demand becomes more inelastic Supply response: Shift in supply structure (commodities x countries) Feedback via energy markets (diversification) Investments and R&D: Specialized vs generics Risk linked to increase crop specialization (lack of rotation) But keep in mind that prices, and price transmissions are not fully transmitted (eg. Corn in Africa vs Corn in the US; heterogenous wheat markets) Page 2
The Worst: the role of Mandatory Policies An additional Inelastic demand (fixed amount of biofuels, not sensitive to prices) in a system already inelastic: Food demand is inelastic: people need to eat Agricultural supply is inelastic in the short term It takes time to grow crops (intertemporal issue) Factors are scarce (water, land) And in the medium term (R&D) When a (climatic) shock happens: Prices will over-react Other components of demand (mainly Feed) are forced to adapt. Page 3
The Past: Impact on inventories Structure of the new demand from 2001 to 2011 Biofuels demand Food/Feed component Quick increase (partially driven by policies) of biofuels during the last 6 years Large share in Marginal Demand of Crops Accelerates Depletion of inventories (or) Reduces the rate of accumulation Palm oil Soybean oil Corn Rapeseed Wheat 0% 50% 100% Page 4
(not) Dealing with stocks No room for a rationale expectation multi country CGE Reduced form equation? Are biofuels / Biofuels policies shifting storage behavior? Average stocks as a proportion of production More flexible policy: may lead to a decrease in the ratio between Average stocks and production
Illustration of structural changes
Page 7 Evolution of the EU biodiesel production
External trade EU 27 - Imports and Exports- Rape seeds Tons Surge of rape seeds imports! Evolution of the EU biodiesel production External trade EU 27 - Imports - Protein Meals Tons Page 8 Limited effects on meal imports
Introducing a stochastic component in the MIRAGE model Caveats: No storage behavior No expectations No risk aversion or not explicitly Introducing yield shocks. Different cases Normalized and homogenous Historic scenario Monte Carlo approach based on Realistic matrix based on cleaned FAO time series Multivariate normal distribution crops x countries Land allocation taken based on the average yield (without shock) Page 9
Coefficient of variations - yields Row Labels PalmFruit Rapeseed Rice Sugar_cb Soybeans Sunflower Maize Wheat VegFruits Brazil 7.6% 19.7% 17.7% 2.2% 8.5% 19.6% 16.7% 22.7% 4.6% CAMCarib 8.6% 6.1% 11.8% 12.4% 6.6% 20.4% 7.8% China 4.0% 9.1% 6.9% 12.5% 14.7% 13.8% 11.9% 7.0% 9.0% CIS 13.7% 10.7% 13.7% 9.9% 11.5% 12.0% 10.5% 6.6% EU27 7.3% 4.5% 9.7% 25.6% 10.7% 10.6% 7.7% 4.0% IndoMalay 5.7% 6.0% 8.7% 2.6% 16.9% 7.4% LAC 6.3% 18.5% 6.0% 2.3% 17.8% 18.0% 12.3% 9.8% 3.0% RoOECD 4.8% 11.2% 5.3% 10.0% 16.0% 17.7% 9.1% 17.1% 2.8% RoW 12.8% 13.5% 3.2% 3.8% 11.9% 12.0% 8.4% 2.8% 2.7% SSA 2.2% 34.1% 6.0% 6.2% 19.9% 17.0% 7.5% 8.8% 2.9% USA 9.7% 5.3% 5.8% 7.8% 11.5% 9.1% 8.2% 4.5% And country x crop correlation matrices! But complex estimations Page 10
Scenarios Focus on the EU policy Mandate -> very limited flexibilities (compared to RINs) Both ethanol and biodiesel Baseline: 2020 with biofuels incorporation remains at 2008 level in the EU (full policies implemented in ROW) Scenarios EU NREAP by 2020 without trade liberalization EU NREAP by 2020 with trade liberalization Yield shock
Structural changes
Land use changes for main crops, 1000 Ha Page 13
Location of cropland extension. Changes compared to the baseline. Km2 Page 14
Price changes (EU Biofuel scenario) 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% No Trade liberalizaiton Trade Liberalization
Impact on volatility
Price fluctuations Homogenous shock Heterogenous shock without trade liberalization with trade liberalization without trade liberalization trade liberalization Maize 3% 2% 4% 6% Rapeseed 16% 14% 14% 12% Soybeans 2% 2% 4% 4% Sugar_cb 3% 5% 2% 2% Wheat 4% 2% 2% 5%
Impact on world price volatility Monte Carlo approach (changes in the standard deviation full EU mandate no trade lib.) Preliminary results do not quote More robust results coming Main trend: reduction in the amplitude Page 18
Concluding remarks Role of structural changes Demand Supply structure Sectoral dimension Spatial dimension In terms of price fluctuations Demand effect seems to dominate